Week 4 Flashcards
You purchased one Coca Cola March 50 call and sold one COCA COLA March 55 call. Your strategy is known as:
a money spread.
A money spread involves the purchase one option and the simultaneous sale of another with a different exercise price and same expiration date.
You are a portfolio manager who uses options positions to customize the risk profile of your client.
Performance to date: Up 16%.
Client objective: Earn at least 15%.
Your forecast: Good chance of major market movements, either up or down, between now and end of the year.
What strategy is best given your client’s objective?
1) Long bullish spread
2) Long straddle
3) Short straddle
Long straddle
A long straddle produces gains if prices move up or down and limited losses if prices do not move. A short straddle produces significant losses if prices move significantly up or down. A bullish spread produces limited gains if prices move up.
An American put option allows the holder to:
sell the underlying asset at the strike price on or before the expiration date.
Suppose the price of a share of Google stock is $500. An April call option on Google stock costs $5 and has an exercise price of $500. Ignoring possible other costs, the holder of the call option will earn a profit if the price of the share
increases to $506.
The break-even point is at $500 + $5 = $505. The price of the stock must increase to above $505 for the option holder to earn a profit.
Other things equal, the price of a stock call option is positively correlated with which of the following factors? (Multiple answers possible).
The stock price.
The time to expiration.
The exercise price.
The stock volatility.
The stock price.
The time to expiration.
The stock volatility.
The price of a stock call option is positively correlated with the stock price, time to expiration, and stock volatility. The exercise price is negatively correlated with the call option price.
